Why do we include a scale weight in our index?

The scoring system for the Financial Secrecy Index looks at each jurisdiction’s secrecy score, then mathematically combines it with a global scale weighting, using IMF data.

We decided to use a weighting for several reasons.

First, if we ranked jurisdictions only according to their secrecy – see the pure secrecy rankinghere – the minnows would generally be ranked at the top: the likes of Vanuatu and Antigua & Barbuda. The top 10 account for less than 1 percent of the global market in offshore financial services. Even if they all cleaned up completely, this would hardly dent the problem.

But our ranking is designed to identify jurisdictions according to their overall global contribution to the problems of tax evasion, illicit financial flows and secrecy. We seek to identify those jurisdictions where reforms to laws and practices would have the greatest effect.

The top ten in our index account for almost 60 percent of the global market in offshore financial services.

Some have argued that by including scale weights, our index “punishes” jurisdictions with large financial sectors. But the mathematical formula we have used is designed the reduce the impact of the scale on the final rankings. A jurisdiction that improves its secrecy score is likely to improve its ranking, whether it has a large financial centre or not.

Here's the thinking behind the mathematical formula. While the secrecy scores range between 42 and 89 out of 100, the weightings have a massively greater range, between tiny Montserrat and the United States. With a simple multiplication we would end up with the size of the jurisdiction being the absolutely dominant factor. So in combining the two scores, we mathematically emphasise the secrecy score (by cubing it) and de-emphasise the weighting (by applying the cube root), in order to give secrecy its due importance, and to make sure that the index is responsive to changes in either component.

A more formal explanation and documentation of the formula, and more details on the scale weight, is included in the full methodology (pdf).